FINRA has issued a regulatory notice to remind member firms about the scope of broker-dealer chief compliance officer (CCO) supervisory liability under FINRA rules. Rule 3110 (Supervision) provides the specific supervisory obligations on member firms. Generally, the supervisory obligations set out in this rule rest on the firm’s business management, and not its CCO, but there are exceptions.
Under Rule 3110, FINRA may bring action against a CCO for failure to supervise only when the firm specifically congers on the CCO supervisory responsibilities and the CCO fails to discharge those responsibilities in a reasonable manner. In those instances, FINRA will also weigh aggravating and mitigating factors in determining whether charging the CCO is the appropriate regulatory response. These mitigating factors could include:
- Whether the CCO was given sufficient support in terms of staffing, budget, training, or otherwise to reasonably fulfill his or her responsibilities.
- Whether the CCO was unduly burdened in light of competing functions and responsibilities.
- Whether the CCO’s supervisory responsibilities, once designated, were poorly defined, or shared by others in a confusing or overlapping way.
- Whether the firm joined with a new company, adopted a new business line, or made new hires, such that it would be appropriate to allow the CCO a reasonable time to update the firm’s systems and procedures.
- Whether the CCO attempted in good faith to reasonably discharge his or her designated supervisory responsibilities
“Chief compliance officers play an important role in facilitating compliance by promoting strong practices that protect investors and market integrity. That does not automatically make them supervisors, subject to FINRA’s supervisory requirements,” FINRA Executive Vice President of Enforcement, Jessica Hopper said. “This Notice helps to clarify when a CCO is—and is not—subject to potential liability under FINRA’s Supervision rule.”
From 2018 to 2021, of the nearly 440 disciplinary actions FINRA brought for Rule 3110 violations, CCOs were charged in 28 of those actions. Of those 28, 18 involved a CCO who was also serving as CEO or president of the firm.